World View & Market Commentary. Forest first; Trees second. Focused on Real & Knowable facts that filter through the "experts" fluff and media hyperbole. Where we've been, what the future may hold and developing a better way forward.

“A system of capitalism presumes sound money, not fiat money manipulated by a central bank. Capitalism cherishes voluntary contracts and interest rates that are determined by savings, not credit creation by a central bank.” – Ron Paul

This is important information. What I've found and present below is that the Federal Reserve is not just supporting the housing market, it is the housing market.

Just as important as a person's desire to buy a home is their ability to gain access to mortgage funding.

The mortgage market is a gigantic beast with many moving parts, but it is pretty easy to understand from a high level.

The process works like this: A homeowner secures a mortgage from a bank or mortgage company. Then the mortgage is sold off to another company, with the cash generated by that sale now available to lend to other potential homeowners. Ultimately the mortgage may pass through several sets of hands but ultimately it lands with a terminal holder.

In that chain, the mortgage might get sold off several times, or perhaps sliced and diced by Wall Street wizards, but all that matters is that some company (with cash) is there at the end to buy the mortgage to keep the whole chain moving along.

Lately, the "terminal buyers" in that chain have increasingly ended up being the federal government (through the GSEs) and the Federal Reserve.

And not just by a little bit, but by a lot.

Here are the numbers:

So far in 2009 (through August), a total of 3.2 million existing homes were sold for an average price of $217,000, while 263,000 new homes were sold for an average price of $264,000.

Taken together, and assuming that we live in a world where 10% is the average down payment, we get this table:

Overall the U.S. industry’s occupancy fell 8.6 percent to end the week at 59.6 percent. Average daily rate dropped 10.5 percent to finish the week at US$98.34. Revenue per available room for the week decreased 18.3 percent to finish at US$58.57.

This is only one of the outrageous aspects of this obvious scam. Ratings agencies are paid by the sellers of these products. Thus, the ratings agencies don't even pretend to independently evaluate these products (which, of course, is the primary function of these companies). The companies selling these products have to explain to the ratings agency how they should value them. If a particular ratings agency doesn't supply the appropriate “rubber-stamp” for the toxic security in question, then they don't get any future business.

It is a scam which is openly fraudulent, yet nothing has been done. Ratings agencies are still being paid by the sellers of these fraudulent securities. They still haven't even hired enough staff to evaluate the products they are “rating”. And government “regulators” still turn a blind-eye to this institutionalized fraud.

Children who are homeless are in bad health twice as often as other children, and four times as often as children with a family annual income of more than $35,000. They are four times as likely to have asthma, and they go hungry twice as often as other children.

Homeless children have delayed development at a rate four times the national average. More than one-fifth of homeless children between 3 and 6 years have emotional problems that require professional attention.

Ignoring the massive spike in government related debt (Federal, State, AND Local) for the time being and focusing instead on household liabilities as a percent of the national income, we see mortgage debt is now at 70% of GDP (more than double the level seen in the 1980's and 50% more than that seen at the beginning of this decade) and consumer debt is now at 18% of GDP.

The importance of all this is of course that all that debt that has been added over the years has been a huge contributor to that GDP. The fear is that the debt has just pulled a lot of consumption forward rather than infrastructure or other long term investments that will provide future growth opportunities.